Why Orzel Spolka Akcyjna’s (WSE:ORL) Return On Capital Employed Might Be A Concern

Today we are going to look at Orzel Spolka Akcyjna (WSE:ORL) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Orzel Spolka Akcyjna:

0.063 = -zł354.3k ÷ (zł22m - zł4.2m) (Based on the trailing twelve months to September 2018.)

Therefore, Orzel Spolka Akcyjna has an ROCE of 6.3%.

Check out our latest analysis for Orzel Spolka Akcyjna

Does Orzel Spolka Akcyjna Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Orzel Spolka Akcyjna's ROCE appears meaningfully below the 7.8% average reported by the Chemicals industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Orzel Spolka Akcyjna stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

Orzel Spolka Akcyjna has an ROCE of 6.3%, but it didn't have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. How cyclical is Orzel Spolka Akcyjna? You can see for yourself by looking at this freegraph of past earnings, revenue and cash flow.

Orzel Spolka Akcyjna's Current Liabilities And Their Impact On Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.

Orzel Spolka Akcyjna has total assets of zł22m and current liabilities of zł4.2m. Therefore its current liabilities are equivalent to approximately 19% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

Our Take On Orzel Spolka Akcyjna's ROCE

If Orzel Spolka Akcyjna continues to earn an uninspiring ROCE, there may be better places to invest. You might be able to find a better buy than Orzel Spolka Akcyjna. If you want a selection of possible winners, check out this freelist of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you are like me, then you will not want to miss this freelist of growing companies that insiders are buying.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.